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Naturally, government spending contributed to inflation


Inflation, we’re told, is a devilishly complex phenomenon. What is causing inflation? Honestly, what didn’t?

Global pandemics have disrupted the supply chain and reduced the availability of goods. Price increases are a result of rising consumer demand. Due to a labor shortage, production costs are rising. Inflation was created to bring life back into an artificially dead economy. The pandemic saw loose monetary policies have their intended effect. Inflation has many sons. Runaway public spending is the one factor that has not contributed to persistently high consumer prices, according to the Biden administration.

“Is the government stepping on the fiscal accelerator? That is, is government fiscal policy contributing to inflation, say, this year?” asked Jared Bernstein, a member of Joe Biden’s Council of Economic Advisers. It was a rhetorical query. “The answer, based on over one trillion dollars of deficit reduction, is no.”

Bernstein’s brazenness here is matched only by Joe Biden’s. The president, too, claimed that he was “the only president ever to cut the deficit by more than one trillion dollars in a single year” in his first State of the Union address. Indeed, the federal deficit in 2022 is expected to decline significantly relative to 2021, but that’s due primarily to the fact that much of the more than $4 trillion appropriated for Covid relief has already been disbursed.

Bernstein failed to answer the question that he asked himself. The spending blitz that the federal government started at the beginning of the pandemic led to inflation. At least that’s the impression you get from economists.

According to the president, “the critical job of making sure that the elevated prices don’t become entrenched rests with the Federal Reserve.” But a study presented last weekend at a gathering of the Kansas City Federal Reserve’s Jackson Hole Economic Symposium concluded that central banks cannot tame inflation if governments continue to flood their respective economies with capital.

“If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure,” the study read. The report’s prognosis was rather dire. If governments continue their unrestrained spending spree, “a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise,” the dispatch added. “In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation.”

The paper claimed that almost half of the inflationary pressures on the American economy are due to Washington’s reckless fiscal policy and the impression that the federal government will continue to lose cash in the future. Jackson Hole Symposium weighed in more than the San Francisco Federal Reserve which placed roughly half of the blame on Washington for the rise in inflation.

San Francisco Fed analysis asks why the U.S. inflation grew at a faster rate than the rest in spring 2022 and winter 2021, “Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021,” the report concluded.

Inflated prices as a response to too much money chasing too few goods isn’t a hard concept to get your hands around. The blizzard of indignation and credentialed vernacular Bernstein summoned to confuse viewers about the factors that contribute to inflation may not be sufficient to overcome the public’s general sense that heedless spending in Washington makes…

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